Global share rally fell short in early May

The Straits Times Index (STI) joined most other regional and global market indices by rallying on the final day of April 2018 to close at 3,613.93, or 36.72 points up. This brings the year-to-date (YTD) performance of the index to 6.20 per cent, and this will cap off what has been a volatile four months.

Source: Phillip Securities POEMS 2.0 trading platform (One-year daily chart of the Straits Times Index (STI), April 30, 2018)

As one might notice from the one-year daily chart of the Straits Times Index (STI), it has breached the 3,600 psychological level, and is firmly establishing a new all-time high of 3,628.43 on April 30, 2018. This is somewhat driven by the optimism on the latest first quarter earnings results of DBS Group Ltd.

DBS Group kicked off the first quarter 2018 banks’ earnings results with an outstanding set of numbers. Net earnings came in at S$1.5 billion, which beat market expectations, were up 21 per cent year-on-year (YoY), and 27 per cent quarter-on-quarter (QoQ). Its net interest margin (NIM) has also widened from 1.74 per cent last year’s first quarter to 1.78 per cent in the final quarter of 2017 and 1.83 per cent for the March 2018 quarter. The return on equity (ROE) improved from 10.3 per cent in fourth quarter to

Let us look at the trading chart for more analysis:

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of DBS Group Ltd, April 30, 2018)

The stock has reached a record high and has breached above the S$30 per share psychological level. The overall momentum as measured by the 14-day relative strength index (RSI) has also surpassed the ‘Overbought’ region of 75.

In February 2018 when markets are at their heightened volatility levels, the bank counter fell to a low of close to S$26 before resuming its climb to the high of S$28 to S$29 per share. The highest it ever went was S$30.60 per share before the bout of selling returned to suppress the stock price climb.

However, with some tailwind coming from the rise in 10-year US Treasury yields to close to 3 per cent, followed by the release of the March meeting minutes by the US Federal Reserve that showed an overwhelming support of more aggressive rate hikes this year, DBS, together with the rest of bank counters rose on optimism that their net interest margins will be fatten. That prompted investors to raise their stock price expectations on the counter.

However, as the month of May approaches sets in, tables have turned, and DBS, along with the rest of the bank stocks appeared to retreat. It could be the notion of “Sell in May, and go away” mantra that got investors realising their previous gains.

Technology counters dipped, but is this the time to scoop

This week, we have seen several local technology stocks dipped to their lowest levels, including the likes of Venture, and Hi-P, among others. These two counters were featured prominently in the local business press due to their exposures to the consumer space.

Venture’s stock price dipped significantly this week after news broke last week about order cancellations for e-cigarettes distributed by one of their key vendors, Phillip Morris International (PMI). Apparently, PMI’s stock declined two weeks ago after they lowered their e-cigarette or its so-called “IQSC” (I Quit Smokeless Cigarettes) range of e-cigarettes. The stock fell close to 22 to 25 per cent over a period one week from its peak of around S$29 to S$30 per share. It closed Friday’s trading at S$19.60, down 15 cents or 0.759 per cent. The stock breached below $19 during the day as well.

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of Venture Corporation Ltd, May 04, 2018)

Looking at the one-year daily chart above, we noted that Venture’s stock price has breached below several technical support levels, including the 50-day moving average (MA), 100-day MA, and the 200-day MA. Most analysts generally expressed some optimism on the counter, with the exception of Credit Suisse which has downgraded the stock. Most kept their ratings unchanged, but with a lower target price of around S$25 to S$27 per share.

Moreover, we noted that the 14-day relative strength indicator (RSI) has not showed that the stock was deeply oversold, and a potential upturn is in sight. Though price-earnings (P/E) multiples are relatively high at about 13 to 15 times, there is still a positivity among the longs as the sale of the IQSC devices to PMI is merely 5 to 7 per cent of the overall total sales volume. Though the news was a deep blow to Venture’s stock price, we think the fall in the share price could be the cashing out of profits. We think that investors might come back in the later months as the dust over the whole PMI saga passes on, and investors get to understand other drivers of the business.

Hi-P stock price fell from grace

Hi-P, another electronics component manufacturer, also suffered a similar fate with Venture. However, unlike Venture’s diversified business model, the overall business of Hi-P is somewhat commoditised, meaning it supplies components to electronics manufacturers like Apple, and Amazon, among others.

In a profit guidance, in conjunction with the release of its latest quarterly results, management guided for FY 2018 to have similar revenue and lower profit as compared to FY 2017 amid customer cautiousness. It’s first quarter earnings ending March 31 rose 20 per cent year-on-year (yoy) on the back of a yearly growth of 15.1 per cent in revenues. The robust first quarter results were driven by healthy sales volumes from Amazon Echo and ultra-flagship phones of Hi-P’s key wireless customer. During the first quarter 2018, Hi-P suffered a net foreign exchange (FX) loss of S$13 million amid the weakening US Dollar (USD) relative to the Chinese Yuan (CNY), and Singapore Dollar (SGD).

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index (STI), May 04, 2018)

From a peak of S$2.79, the stock has plunged almost half to the closing price of 1.46 as of Friday, May 04. The 14-day RSI has also shown that the stock was oversold with a reading of 20.103 and is below the ‘Oversold’ reading 30.

In a May 04 technical analysis (TA) report published by Phillip Securities Research, it was noted that Hi-P’s stock price failed to maintain the S$1.79 support area and has broken the uptrend structure of Higher Highs (HH), and Higher Lows (HL).  It added that after the price broke below the S$1.79 critical support level on April 26, the selloff accelerated dragging the RSI into extreme oversold condition at 23, suggesting for a mean reversion higher soon.

Source: Phillip Securities Research (May 04, 2018)

Similarly, management expressed confidence in the stock through its share buyback exercise on May 04. In a SGX filing, management bought back 400,000 shares at a price range of S$1.46 – S$1.47. The latest share buyback could be an indication that management is firmly believed in the overall fundamentals of the company, and the latest plunge in the share price may not truly reflect its intrinsic value.

Investors might ask if this is a good time to scoop some local technology stocks, including the likes of Memtech, UMS, Powermatic Data, Micro Mechanics, and Allied Technologies, among others. As a sector, most of these technology stock prices have shot up significantly last year, and there is a risk of missing high expectations set for these technology counters this year as seen from the two examples, Venture and Hi-P.

However, as we dwell into the negativity surrounding the industry’s fundamentals, we should not forget that the global manufacturing purchasing managers index (PMI) is still holding up well. That is, most countries (regionally, and globally) PMI numbers are still above the 50 level, which suggests continued robustness of the overall manufacturing sectors. A chart depicting the World Composite PMI is shown below:

Source: TradingEconomics.com

With the exception of March 2018, one might notice a gradual uptrend in the world PMI composite. As the PMI showed, there has been a gradual uptrend since last year and this is being driven in part by economic growth in several countries, including the Asia-Pacific region.

Trade wars aside, if both US and China manage to work towards common goals of establishing good trading relationships, along with the opening of both markets, we think that manufacturing growth will continue to persist. We shall monitor the overall trend in the manufacturing PMI going forward.

Bank stocks fell despite upbeat quarterly results

The two local banks, DBS Group Holdings Limited, and UOB have reported their financial results for the quarter ending March 31, 2018, and both banks did well in their net interest margins (NIMs), and their wealth management arms. OCBC is scheduled to report its first quarter results on Monday, May 07.

For DBS, it’s first quarter net profit beat expectations with a 26 per cent rise to S$1.52 billion from last year as total income increased 16 per cent to S$3.36 billion. The increase in earnings came from broad-based loan and non-interest income growth, and as well as higher net interest margin (NIM).

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of DBS stock price, May 03, 2018)

Looking at the chart for the past one week, the stock price has fallen from a peak of S$31.28 after Labour Day to a low of S$28.80. We think that the stock price correction could be due to profit taking opportunities undertaken by investors seeking to cash in after it reached S$30 late last week.

For UOB, it reported first quarter 2018 profits of S$978 million, up 21 per cent from last year. In a research report by DBS Vickers, it noted that 1QFY2018 earnings were driven by higher NIM, and lower credit costs. The NIM rise was driven by an uptrend in Singapore Offered Rate (SOR)/Singapore Interbank Offered Rate (SIBOR) growth seen in 4QFY2017, and significantly lower credit costs.

A summary of UOB’s latest 1QFY2018 numbers is as follows:

Source: Phillip Securities Research, UOB

UOB’s stock price did not seem to fall much from its peaks

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of UOB stock price, May 03, 2018)

Similarly, for UOB, the stock price did fall a bit as it closed Friday’s trading at S$29.07. This could be due to the potential profit taking by some investors. However, the stock was not sold down across the board as seen by the 14-day RSI which is still at around the mid-term point of ‘Overbought’ and ‘Oversold’.

Summary of the STI close on Friday

 

Source: Phillip Securities POEMS 2.0 Trading Platform (One-year daily chart of the Straits Times Index, May 05, 2018)

The Straits Times Index (STI) closed Friday’s trading session at 3,543.38, 30.3 points lower, or 0.85 per cent. This brings to the year-to-date performance to 4.2 per cent. Overall, trading volumes were huge at about 2.09 billion shares worth S$1.203 billion changed hands. This compared to Thursday’s trading volume of 2.23 billion worth S$1.554 billion. The trading day on Friday saw 158 winning stocks as compared to 258 lagging counters.

Looking at the one-year STI chart, we noted that the index has broken the 3,600 psychological level in mid-April, and has seen many attempts to hold above that level. The biggest breakthrough came on the first trading day of May after Labour Day when the STI closed the trading session on May 02 at a high of 3,615.28.

We think at the current level of 3,545.38, we might see another attempt to break above 3,600. However, we think that holding above 3,600 could be challenge as shown by the last two attempts in April which failed to push through.

Using the Fibonacci Retracement analysis, we noted that the STI has fallen below the 78.6 percentile level, and if it fails to hold above that level, the next support line might be the 50-percentile level or 3,418.37. However, if it breaks above 3,547.87, we could see the index rising to a high of 3,644.76.

Sell in May and go away mantra. Any Truth behind it

The all popular stock market prophecy of “Sell in May and go away” holds some truth, but is not all consistent throughout the history. In a 2016 CNBC.com interview with one of the co-authors of a 2012 research paper done by University of Miami associate professor Michael Fuerst, together with his colleagues Sandro Andrade and Vidhi Chhaochharia, they noted that stock returns were 10 per cent higher in the November – to – April half of the year than in the May – to – October period. One of the major cruxes of the paper is that the result is not solely based on historical American stock returns. They also examined returns across 37 markets within a 14-year time period that was not tested in an earlier paper that also found support for the sell in May effect. Although the sample size was relatively small, the authors were able to show statistical significance.

Source: CNBC.com (April 29, 2016 article entitled, “It sounds crazy, but ‘sell in May and go away’ is good advice)

The authors also noted that for US markets, selling in May generated 6.9 per cent of outperformance in their sample. That compares to 10.5 per cent in Brazil, and a 25.9 per cent in Russia.

However, this study like other research papers continued to baffle investors until the extent that it might only create confusion, and probably caution. This might explain some of the investors holding back from the markets. But, if one were to turn the tables around and look from the perspective of opportunities, the “Sell in May, and go away” might provide opportunities to buy/long counters that are fundamentally strong yet been sold off heavily when markets start to turn south. There are plenty of examples, including the case of Singtel’s stock price which fell from a high of S$4 to a low of S$3.31 before settling at the current levels of S$3.49 – S$3.52 per share.

Source: Phillip POEMS 2.0 Trading Platform (One-year daily chart of Sintgel’s stock, May 05, 2018)

Looking at the one-year daily chart of Singel’s stock price, we think that Singtel’s stock price is seeing some mean reversion after being touted every quarter as the laggard telecommunication stock. The sell down persists even though their business model is somewhat diversified internationally, and across various product lines. While its peers have been battered hard against tough comparisons, the counter managed to stay firm at around the S$3.49 to S$3.52 price range. More importantly, its fundamentals are strong and was seen trading at about 10 to 13 times earnings with a trailing twelve months (TTM) dividend yield of around 5 to 6 per cent per annum.

So, for investors still waiting on the sidelines, and are uncertain whether to enter or exit the market completely, we do not advocate any extremes, except to say that you do not always need to buy or to sell unless fundamentals changed drastically. We hope that with most of the data being illustrated here, you are convinced that it is not all doom and gloom yet for global stock markets.

US markets ignore gloomy jobs report, and head higher on Friday

Despite a gloomy start for April’s US jobs figure of 164,000 new jobs, versus an expected 195,000, and the unemployment rate falling to 3.9 per cent, investors were more focused on Mr. Warren Buffett’s Berkshore Hathaway’s acquisition of 75 million shares of Apple’s (AAPL) stock which gave a positive shot upwards for the technology sector as illustrated by the Nasdaq 100 index shown below.

Source: Stockcharts.com (One-year daily chart of the Nasdaq 100 index, May 04, 2018)

The Nasdaq 100 index as shown in the chart above got a shot in the arm by staging a technical rebound as shown by the long white candle on the right-end of the chart. According to Wikipedia, the Nasdaq 100 index is a modified capitalisation-weighted index comprising of 103 equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq. It is probably one of the better indicator if one wants to focus on just the technology sector as the index has screened out the non-financial companies.

Looking closely at the index, we noticed that the index is also not heavily oversold as denoted by the 14-day RSI reading that is neither showing any oversold or overbought conditions, as the reading is close to 55.

Apple of the eye

Apple’s (AAPL) stock was the centre of attention for much of the US trading on Friday when famed investor Buffett disclosed in an interview on CNBC on Thursday that his investment holding company, Berkshire Hathaway made a share acquisition of 75 million shares worth about US$100 billion during the first quarter, and the stock price of the iPhone maker shot up to close at US$183.83 on a trading volume of 56.2 million shares. This follows after AAPL reported this week that iPhone sales were up from a year ago, and its CEO Tim Cook said in a statement that customers “choose iPhone X more than any other iPhone each week in the March quarter.”

Source: Stockcharts.com (One-year daily chart of Apple’s (AAPL) stock price, May 04, 2018)

Looking at the chart, the index scored a technical breakout shown on the extreme right of the chart as it rose higher from the 50-day moving average (MA) line of US$172.97 to end Friday’s trading at a record high of US$183.93.  The stock was earlier downgraded in the previous week due to uncertain outlook of iPhone sales in China due to the bickering over trade relations between China and the United States. Moreover, Taiwan Semiconductor Manufacturing Ltd (TSMC), a key component supplier for Apple reported lower than expected shipment orders.

US Federal Reserve expressed ‘symmetrical’ attitudes over inflation rates

This past week we saw the US Federal Reserve coming out to leave the short-term federal funds rate unchanged, and it expects inflation rates to be ‘symmetrical’ over the long-term rate expectations. The economists reading the Fed statement thinks that the central bank is willing to let inflation run a little bit over their targeted 2 per cent mark, and probably not act swiftly to raise interest rates unless the there are other indicators which might show deterioration.

Moreover, based on the Fed Funds Futures, it is almost fully certain that the June meeting will see the US Fed raising interest rates by another 25 basis points as shown in the probabilities table below:

Source: CME Group Fed Funds Watch (May 04, 2018)

As we enter into the thick of May where the North American summer holidays are about to approach soon, one can’t think much except heading to the beaches. However, with an expected rise in volatility, it pays to be defensive, and not spending a lot of time watching talking heads commenting about the markets and stocks.

Summary of the US closing numbers on Friday

Source: CNBC.com (May 04, 2018)

Going forward, we think that this period of the year where US markets appear to be calm, but as more light is shed on what it is going to come in the next month, and/or the following month, we think that investors will eventually take some profits before heading out for holidays. This could impact of the investor’s behaviour. We shall continue the overall investor behaviour and update you.

Summary of the virtual portfolio returns

Note: Model equity portfolio performance as of May 04, 2018. For illustration purposes only, and information is not verified by third party. Past performance is not necessarily indicative of future performance. Please seek the advice of your qualified licensed financial adviser before any investments are undertaken.

Since the inception of the model equity portfolio at the end of November 2016, the latest portfolio returns this week have shown a major outperformance of 85.71per cent, inclusive of capital returns, dividends earned, and realised returns earned during the last rebalancing round on December 31, 2017. This compares to the total return of 22.04 per cent for the Straits Times Index (STI) during the same time period.

The top three holdings in total return terms (dividends plus capital gains) include Nordic (up 43.4 per cent since end June 2017); followed by Ascendas Reit (up 13.6 per cent since November 2016), and SATS Ltd (up 13.5 per cent since December 2016).

The model equity portfolio did experience a shortfall coming from Singtel (down 7.4 per cent since December 2016); followed by Straits Trading (down 10.2 per cent since end June 2017).

For now, we are not planning to make any changes or do any rebalancing for the portfolio. We shall actively monitor the model portfolio till end of June 2018.

Upcoming Earnings News next week

Source: Phillip Securities Pte Ltd, SGX

Some of the key STI component stocks that are scheduled to report their financial results include OCBC (May 07); followed by Genting Singapore, and Wilmar (May 10); City Development, ST Engineering, and UOL (May 11).

Economic data releases to look out for next week

Singapore

Source: TradingEconomics.com

A key local economic data to look out for next week is the March Retail sales data which will give us an idea on consumer spending the health of the tourism sector in Singapore.

China

Source: TradingEconomics.com

With the US-China trade negotiations ended on Friday, May 04 with no firm conclusions, it is perhaps interesting to watch for next week’s release of China’s trade data for April to gauge the extent of Chinese exports to the United States.

United States

Next week, some of the key US economic data include inflation rate data, and the University of Michigan Consumer Sentiment reading.

Have a safe investing week.

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About Peak Hour 86 Articles
Hock Meng has 12 years of financial industry experience, including three years working as a research associate for a hedge fund company in Wall Street, US, with assets under management (AUM) close to US$400 million during its peak in 2008. Hock Meng is a Chartered Alternative Investment Analyst (CAIA) holder and passed his Level I Chartered Financial Analyst examinations. Hock Meng is licensed to provide investment advisory services in the area of unit trusts, dividend portfolio construction, securities wrap services, and life insurance planning